Legislators to Regulators: SEC Accounting Bulletin on Digital Assets "Not Enforceable"

House Financial Services Committee Chair Patrick McHenry (R-NC) and a bipartisan group of legislators asked banking regulators to clarify "through guidance and other actions" that SEC Staff Accounting Bulletin ("SAB") 121, which describes how a custodian must account for digital assets, is not enforceable.

The letter follows from a recent GAO determination that the accounting approach taken in the Bulletin "deviates from established accounting standards, would not accurately reflect the underlying legal and economic obligations of the custodian, and places consumers at greater risk of loss." Generally, SAB 121 requires that a custodian treat a digital asset that it custodies as both an asset (what it holds in custody) and as a liability (its obligation to return those assets), an accounting treatment that would affect the size of the custodian's balance sheet.

In the letter, the legislators highlighted GAO's determination that SAB 121 should be considered a rule to be adopted under the Congressional Review Act, and that the Bulletin did not comply with the required procedures for rule adoption. As a result, the legislators argued that: (i) SAB 121 should have no legal effect, (ii) the banking agencies should not require financial institutions to provide custody services for digital assets to comply with SAB 121 and (iii) financial institutions do not need to add custodian digital assets to their balance sheets.